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SCOPE AND METHODS OF ECONOMICS

I Learning Objectives:

At the end of this module, learners must be able to:

1. Identify the origin and standard definition of economics;

2. Explain the history of economics;
3. Outline the economic methods in proper sequence;
4. Summarize the limitations of economic models;
5. Explain the various approaches to economic thinking; and
6. Differentiate microeconomics from macroeconomics.

II Key Terms

Economics Normative economics

Scarcity Positive economics

Economic analysis Microeconomics

Economic theory Macroeconomics

III Core Contents

INTRODUCTION

This module introduces economics by discussing its basic background, history and
classifications and approaches that are useful for both business and non-business
students. Economics is about the very survival of humanity that is why it is central to
every other branch of social science. This science deals with the human behavior and
his decision making in managing limited resources to satisfy his unlimited needs and
wants- hence the science of scarcity and allocation.

IV In-Text Activity

Why should you learn economics?

https://www.youtube.com/watch?v=CE5eJbaHL8s

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A. Definition and History of Economics

The word economics was derived from the Greek words oikos (household) and
nomos (management). Ancient economics therefore was equivalent to management of
households (oikonomous). The etymology of its equivalent in Sanskrit, arthashashtra ,
arth meant purpose and shashtra meant science. In simple definition, economics if the
study of human behavior to seek benefits.

Economics is considered as a social science as it was introduced by Adam

Smith, the father of Economics. In his book “Wealth of the Nations”, he referred to the
term as the study of the nature and causes of wealth of nations. It is a social science
because it basically leans on the human behavior in addressing their respective needs.

As a standard definition, economics is a social science that deals with the

efficient allocation of scarce resources to satisfy the unlimited human wants and needs.

In the 19th century economics was the hobby of gentlemen of leisure and the
vocation of a few academics; economists wrote about economic policy but were rarely
consulted by legislators before decisions were made. Today there is hardly a
government, international agency, or large commercial bank that does not have its own
staff of economists. Many of the world’s economists devote their time to teaching
economics in colleges and universities around the world, but most work in various
research or advisory capacities, either for themselves (in economics consulting firms), in
industry, or in government (Blaug, 1999, revised by Enriquez, 2020).

B. Economic Methods

Economic analysis is the process of directing economic relationships by examining

economic behavior and events and determining the causal relationships among the data
and activities observed.

A student in economics who attempts to analyze relationships among economic

variables must learn to draw conclusions from the particular to general through
deductive reasoning which necessitates the use of the first tool in Economics which is
logic.

On the other hand, the economic analyst uses statistics to quantitatively describe an
economic behaviour and therefore serves as a basis in hypothesis testing.

The third tool of economics is mathematics which enables the analyst to

conceptualize and quantify a hypothesis for empirical validation.

Purposes of Economic Analysis

1. Economic analysis is an aid in understanding how economy operates because it

explains how economic variables are related to one another.
2. It permits the prediction of results of changes in the economic variables.

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3. It serves as the basis of policy formulation.

Economic Policy

Economic policy consists of intervention of courses of action taken by the

government or other private institutions to manipulate the results of economic activity.
The economic policies adopted by the government may be monetary, fiscal or trade for
the purpose of achieving economic welfare.

Construction of Economic Theory

Just like any other field of science, formulating theories in economics requires a
thorough methodology specified below.

1. Specification and definition of postulates.- Postulates are given conditions upon

which a theory will be erected. For example we may postulate about the
consumer behaviour in a supermarket, specifically, the relationship of their
income to the degree of their satisfaction.
2. Observation of facts.- In the situation, the activity in question is the exchange f
groceries between the supermarkets and the consumers, the activity should be
observed thoroughly. As facts emerge, we can identify significant observation.
The hair color of the consumers or the color of the grocery personnel’s uniform is
not likely to matter but the weekly budget of consumers and the quantity of
available groceries will be important.
3. Application of the rules of logic to the observed facts.- Deductive chains of logic
may believe that certain effects follow certain causes in regular manner. We may
reason that because consumers with larger incomes are willing to pay higher
prices for specific goods, an increase in consumer income may likely lead to
higher prices. This tentative conclusion is called hypotheses.
4. Test the formulated hypotheses and generalize a principle.- The tools of statistics
and econometrics will equip us to test the quantified observed data. From the
results, we can now come up to our theory or principle in economics.
C. The Functions of Economic Theory
The principal functions of economics fall into two categories: (1) to explain the nature
of economic activity and (2) to predict what will happen to the economy as facts change.
Positive economics is supposed to be completely objective, limited to the cause-
and-effect relationships of economic activity; it is therefore concerned with the way
economic relationships are. It is factual and is used to describe occurrence of a
phenomenon.
Normative economics however, is concerned with what ought to be or what should
be. This is more subjective and more judgmental. In contrast, normative economics is
more predictive than descriptive in usage.

D. Major Divisions of Economics

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Price theory (microeconomic theory) and the theory of the economy (macroeconomic
theory) constitute the basic analytical tool kit of the discipline of economics.

Microeconomics is concerned primarily with the market activities on individual

economic units such as consumers, resource owners, and business firms. It is
concerned with the flow of goods and services from business firms to consumers, the
composition of the flow and the process for establishing relative prices of the
component parts of the flow. It is concerned too with the flow of resources (or its
services) from resource owners to business firms, with their evaluation, and with their
allocation among alternative uses.

Macroeconomics is concerned to the economic system as a whole rather than

individual economic unit of which it is composed. The particular goods and services
making up the flow from business firms to consumers are not integral parts of the
analysis, nor are the individual resources or service moving from resource owners to
business firms. The value of the overall flow of goods (net national product) and the
overall flow of resources (national income) receive the focus of attention.

Macroeconomics concentrates on the causes of change in aggregate movement of

goods and services, and the general employment level resources. Macroeconomics has
much to say about the nature of economic growth and the conditions necessary for the
expansion of productive capacity and national income time.

Moreover, the distinction is to be understood as relative in nature. The problems of a

city municipal corporation and macro in nature as compared to those of individual
citizens, but a city unit is micro as compared to a state, and the state unit is micro as
compared to the nation and the national unit is micro as compared to a global unit.
All economic problems and activities, whether micro or macro, are ultimately connected
with making a choice and optimization. They emerge out of and are concerned with
human behavior.

V Session Summary

Economics is a social science that deals with the efficient allocation of scarce
resources to satisfy the unlimited human wants and needs. It came from the Greek root
word oikomos which means household management. Logic, statistics and mathematics
are key methods in making economic analysis

Just like any other science, the construction of economic theory includes
processes such as: (1)Specification and definition of postulates , (2) Observation of
facts, (3)application of the rules of logic to the observed facts and (4)test the formulated
hypotheses to generalize a principle.

In analyzing economic theories, students taking up economics may follow the

economic approached-positive and normative economics. These two approaches utilizes
facts and predictions for decision making. Macroeconomics and microeconomics are the

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two major divisions of economics. Macroeconomics tackles the broader and aggregate
level while Microeconomics is concern with individual economic decisions.

V SELF-ASSESSMENT

Economics is a course included in your program not just because it has to be

included as mandated, but because it focuses on issues that affects everyone -
everywhere-everyday. You are now task to create a one-page essay about the
economics of yourself-the decisions that you do as a scarce resource-because, Yes, you
are! As a college student, cite and discuss examples of your personal decisions (could
range from small matters to big life-changing decisions) in which you think you have
applied some economic way of thinking.

The essay should follow the following format:

Font : Arial, size 11
spacing: 1.5
margins: 1 inch top, sides and bottom

Please save as Word Document , following this format for the file name:
SURNAME.FIRSTNAME.ECONSANUMBER1
Submit to myLPU or send to azelle.tayson@lpu.edu.ph , indicate the filename as
SUBJECT of the email.

VI REFERENCES

Please refer to the references indicated in the syllabus.

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Module I. SCOPE AND METHODS OF ECONOMICS Principles of Economics with LRT

ACTayson (2020)